On the Potential of GATT Article XX for the Renewable Energy Sector

Energy security is a critical concern for many States, as it involves ensuring reliable access to affordable energy resources. Therefore, renewable energy becomes indispensable for the growing energy needs of world. Due to the absence of clear international trade regulations regarding renewable energy, implementation of policies that support it may lead to international trade disputes. This became evident recently, when the European Union (EU) accused the United Kingdom of violating Article III:4 of the General Agreement on Tariffs and Trade (GATT) by implementing Local Content Requirements (LCRs) in the Contracts for Difference scheme, which favored domestic producers over foreign ones. LCRs are policy tools used by governments to promote the use of domestic resources and suppliers in the production of goods and services. LCRs require a certain percentage of a product’s value to come from domestic sources, either in the form of domestic production or the use of domestic inputs, such as raw materials or components. Ultimately, the parties reached a mutually agreeable solution, and the EU ended the dispute resolution process. This highlights an important issue of how LCRs are treated under World Trade Organization (WTO) laws.

To ensure the viability of renewable energy projects, it is crucial to further explore LCRs as they can affect the cost, availability, and quality of renewable energy technologies. If LCRs are excessively strict, they may increase the cost of renewable energy projects and reduce their competitiveness against conventional energy sources, hindering their deployment at scale and impeding their cost parity with traditional sources. Conversely, weak LCRs may not create a sufficient market for local industries to develop, resulting in a dependence on foreign suppliers and impeding the sustainable growth of the renewable energy sector.

Hence, a balance must be found between promoting local industry growth and ensuring the cost-effectiveness and quality of renewable energy technologies. This can be achieved by creating policies that incentivize domestic industry growth while providing flexibility in sourcing components from overseas and promoting knowledge-sharing and technology transfer between nations. In this context, this blog post argues that LCR should be interpreted alongside GATT Article XX to safeguard and encourage renewable energy-supportive measures.

Understanding LCRs: Origins and Interpretation Under WTO

This section will explore how WTO panels and the Appellate Body (AB) have interpreted LCRs. Canada’s use of LCRs was challenged by the EU at the WTO in relation to its feed-in-tariff program for renewable energy generation. The arrangement of Canada’s feed-in-tariff program was designed in a way that provided certain advantages to domestic suppliers over foreign suppliers for materials necessary for renewable energy generation. This violated Article III:4 or the National Treatment principle of GATT. The AB found that Canada’s feed-in-tariff program discriminated against foreign producers of renewable energy equipment by requiring a certain percentage of the equipment used in the program to be manufactured domestically. The AB concluded that the feed-in-tariff arrangement was inconsistent, as it constituted a quantitative restriction on importation of equipment for generation of renewable energy and ruled in favor of EU.

In the case of Certain Measures relating to Solar Cells and Solar Modules in India, the United States filed a dispute with the WTO against India regarding certain measures related to LCRs for solar cells and solar modules in India’s National Solar Mission program. The United States argued that India’s domestic content requirements were discriminatory and violated WTO regulations. India, however, claimed that its measures aimed to promote the development of the domestic renewable energy industry and were in line with WTO rules. In September 2016, the AB ruled in favor of the United States, determining that India’s LCRs were incompatible with the national treatment obligation under Article III:4 of GATT and the Agreement on Trade-Related Investment Measures.

These recent cases indicate that when the ultimate objective of the measure is not taken into consideration by the WTO AB, LCRs are deemed unlawful. These rulings further indicate the WTO AB’s disinterest towards environmental objectives and its excessive emphasis on trade regulations. This becomes more concerning when one considers the limitations that such an approach imposes on policymaking, as governments may be restrained from supporting the development of renewable energy and achieving climate targets, which could impede progress towards a sustainable future.

The National Treatment Principle and Its Limit

Some scholars argue for the utilization of the national treatment principle as a means to promote renewable energy. For instance, a State may introduce a subsidy program to promote the use of renewable energy, such as solar or wind power. Under the national treatment principle, this subsidy program must be made available to both domestic and foreign companies operating in that State. This means that foreign renewable energy companies can benefit from the same subsidies and incentives as domestic companies, making it more attractive for them to invest and operate in that country. However, this measure fails to acknowledge the primary purpose of LCRs, which aim to bolster domestic industries, create employment opportunities, and stimulate economic development. Such objectives may prove challenging to attain if foreign suppliers are granted equal treatment under national treatment principle. Additionally, renewable energy initiatives typically require significant government investment, and LCRs may serve as a mechanism to ensure that a portion of that investment remains within the domestic economy.

This is not the first time that the national treatment principle hinders the realization of legitimate governmental goals. Indeed, this was also the case when South Korea imposed a ban on the import of beef products from the Unites States due to concerns about Bovine Spongiform Encephalopathy or mad cow disease, a fatal neurological disease which can be transmitted to humans who consume infected beef products. This resulted in a violation of national treatment obligations as imported beef was treated unfairly compared to domestic beef, as it was deemed more restrictive than necessary to protect public health. The disregard for the Korean government’s concerns over mad cow disease and its potential impact on public health was evident. Similarly, a WTO panel found that Section 337 of the United States’ Tariff Act of 1930, which treated imported goods (inter alia electronic devices, pharmaceutical products and semiconductors) less favorably than domestic goods, was restrictive and incompatible with the national treatment principle. However, the panel failed to acknowledge that the said measure, was intended to allow the United States International Trade Commission to seize and desist the import of patent-infringing goods from Canada in order to safeguard the rights of domestic patent holders.

As the above analysis demonstrates, the national treatment principle can hinder a State’s ability to regulate in the public interest. Thus, it is crucial to strike a balance between the equal treatment of foreign suppliers and the State’s legitimate objectives.

Reading LCRs into GATT Article XX’s Exceptions

GATT Article XX provides for a list of exceptions, based on which States can justify measures that may be inconsistent with their obligations under the agreement. By interpreting LCRs through Article XX, some of the criticisms surrounding these requirements may potentially be addressed. One of the criteria for Article XX is that the measure in question must be necessary to protect a legitimate public policy objective, such as environmental protection. Therefore, States could argue that LCRs are necessary to achieve environmental objectives, like reducing greenhouse gas emissions or promoting the use of renewable energy.

However, to justify LCRs under Article XX, States must also demonstrate that the measures are not applied in a discriminatory or arbitrary manner. This means that States must ensure that the requirements are applied fairly and do not unduly restrict foreign suppliers’ trade. The relevant provisions of Article XX of GATT are clause (b) and (g), which pertain to measures necessary to protect animal and plant life and measures related to the conservation of exhaustible natural resources for effective domestic consumption or production. Nonetheless, Article XX (b) and (g) have never been utilized in a renewable energy dispute except for India’s unsuccessful attempt to defend their measures in  Certain Measures relating to Solar Cells and Solar Modules. This was due to the failure of India to demonstrate to the WTO panel that the LCR requirement was to further the goal of renewable energy and not to discriminate between domestic and foreign companies.

The exceptions of Article XX further require that the necessary measure has a rational connection to the objective pursued and that it is also of the lowest degree of necessity required. In US-Gasoline, the AB stated that using LCRs would require States to demonstrate a close and rational relationship with the objective of conserving clean air. Additionally, in US-Shrimp, the AB held that the US ban on shrimp imports was necessary to protect endangered species under the CITES convention, even though it discriminated against foreign suppliers. Finally, in Brazil-Retreaded Tyres, the AB found that the ban on imported retreaded tires was necessary to safeguard human health and the environment and was rationally connected to the objective.

Conclusion

In conclusion, interpreting LCRs using GATT Article XX can be a useful tool for promoting renewable energy. By justifying LCRs on the grounds of protecting the environment and promoting the conservation of exhaustible natural resources, Article XX can provide a basis for implementing policies that encourage the use of renewable energy sources. If they require a certain percentage of renewable energy components to be produced domestically, States will create a market for renewable energy products and support the growth of domestic industries in this sector. This can help reduce reliance on fossil fuels and promote the development of sustainable energy systems. Nonetheless, while interpreting LCRs using GATT Article XX can be a useful tool for promoting renewable energy, it is important to balance the benefits of such requirements against the need to maintain an open and fair-trading system.